Designing for systems-based financing — what principles, attributes and considerations will be required? The Yunus Centre, Griffith University (2021)

Our Impact Finance R&D program

A conceptual framework

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This piece was written in October 2021 and reflects our thinking at this time.

A recap of our Missions program

In 2021 we integrated a Mission-led approach into our work, choosing three focus areas for our research and development (R&D) program — circular economy, impact finance and civic innovation. Mission-led, or ‘mission-orientated’, approaches are often deployed in response to ‘grand challenges’ which no single entity, discipline or stakeholder group can address on their own. As an innovation Centre, we are committed to experimenting with new and complexity-informed approaches to advance our goal to accelerate transitions towards regenerative and distributive economies by growing knowledge and capability. We have identified that, for us in our work, a mission-led approach provides:

A valuable sensemaking framework, that can enable diverse and distributed stakeholders to align their efforts around complex goals and experiment with new approaches, including navigating relationships between ‘means and ends’ — I.e. how the processes, practices and values we adopt shape our goals, while also generating the contextual framing needed to progress towards them.

Our orientation to mission-led work focuses on ‘demonstration’ activities that address real-world challenges. These projects will be delivered in collaboration with industry, civil society and public sector partners. Our aim is to generate practical improvements in practice, knowledge, relationships and outcomes.

Within our mission-led approach we are also intentionally seeking to contribute to the Sustainable Development Goals (SDGs) and also uphold principles of social justice, such as those articulated in the UN Declaration on the Rights of Indigenous Peoples. We will be designing and deepening our approach in respect to these agendas over time.

We are designing our work to incorporate three interdependent levels of activity — mission, program and project. At each of these levels we aim to:

  • Take an active stewardship role
  • Advocate for promising pathways towards regenerative futures
  • Push back against narratives that could be damaging to these emerging approaches.

Read more on our framing and how we are approaching this strand of our work.

Our Impact Finance R&D mission

Impact investment seeks to generate positive social and/or environmental outcomes alongside financial returns (GIIN 2009). Going beyond practices of ‘negative screening’ (or ‘doing no harm’) and ESG (Environmental Social Governance), it represents the proactive allocation of financial capital to address societal challenges, resource impact-orientated solutions and create public value.

Since the term was first coined at a gathering convened by the Rockefeller Foundation in 2007, the global impact investment market has grown significantly and was estimated to have reached $715bn of assets under management (AUM) in 2020 (GIIN, 2021).[1]

During this time, impact investment practices (and language) have also gained traction in mainstream finance, been consolidated by underpinning management and measurement principles (International Finance Corporation, 2019, Impact Management Project, 2018), and become entwined with the advancement of numerous progressive and cross-sector movements (Global Steering Group for Impact Investment (GSG), 2019). This includes the pursuit of the SDGs (SDG Impact, 2019).

However, ‘impact investment’ isn’t the only financing approach that seeks to generate public value. Other approaches include: social finance, community finance, cooperative finance, indigenous investment, venture philanthropy, and numerous public sector-led initiatives. Most of these approaches precede the emergence of impact investment, and while ‘impact investment’ has become a dominant and galvanising narrative, it is an error to see it as a catch-all or novel agenda, or to use the term interchangeably with other approaches. Indeed, these approaches are often functionally (and normatively) distinct from impact investment, and play specific roles within a broader ecosystem of impact-based financing.

Looking ahead, as the need for impact-led innovation and efforts to transition the economy intensify, these various movements will increasingly collide, converge, and evolve. Together, they represent a dynamic and contested field that we call ‘impact finance’. A more technical definition might be:

‘the supply and allocation of financial capital to resource and enable the creation of public value’.

This is the domain of our R&D mission.

Our Framing

Around the world, and in Australia, governments, financial institutions, businesses, non-profit entities, philanthropists, individuals, communities, and specialised intermediaries are all simultaneously engaging in the field of impact finance — seeking to progress transactions and also shape and build the markets that will enable impact financing to become more accessible, efficient, and effective.

While these developments are promising in respect to growing the capital available to resource the innovations and actions required to foster safe and sustainable futures, they have not yet proved to be sufficient. On current trajectories the SDGs will not be achieved by 2030, leaving our societies exposed to a range of systemic risks and unknown consequences (UN, 2020). While progress, or the lack of it, towards the SDGs should not be solely laid at the door of the capital markets, they undoubtedly have an essential role to play.

Beyond the obvious, if non-trivial, challenge of scaling the supply of capital towards these impact-orientated goals, there are also more fundamental, if nuanced, factors that relate to the underlying systems, mechanisms and mindsets that determine the flows and allocation of capital, and also how value is appraised and distributed. Indeed, we propose that while the often-cited financing gap of USD$2–3tn per year (UN, 2019) required to achieve the SDGs is material, it disguises the deeper challenges of growing a genuinely transformational financing system.

In addition to increasing the supply of capital (and it should be noted that USD$3tn is actually a relatively small slice of the estimated USD$100tn AUM (BCG, 2021)), impact finance also needs to be the right type of capital. While many solutions aligned with the SDGs present attractive returns for investors, many more do not. And regardless of the uptake of approaches that seek to blend ‘finance-first’ and ‘impact-first’ pools of capital, too few resources are finding their way to activities seeking to address market and systems failures, or to people who fall outside prevailing views of ‘investability’, or to initiatives that require long time horizons to generate value and returns.

Certainly, achieving bold goals such as the SDGs will require a profound unlocking of the latent potential within and across society, and this will include many actors and activities that are not currently served or valued by the capital markets, or even impact investment.

A graphic demonstrating the mismatch between supply and demand of capital. The majority of supply goes to investments with proven returns and impact capacity. There is a funding gap for just as important work where impact or model is unproven.
There is currently a mismatch between supply and demand in impact investment, The Yunus Centre, Griffith University, 2021

Related and equally important is rewiring the underpinning structures and institutional arrangements of financing systems to have fidelity with a regenerative and equitable agenda. What has served the more singular objectives (and private interests) of traditional investment well (although not always), will need re-imagining to adequately serve the distinctive goals (and commons interests) and transactional contexts of impact financing. This need for critical thinking and structural reform will become more pressing as ESG, responsible investment, and even impact investment approaches are assimilated by mainstream finance, and in many cases are brazenly co-opted for marketing advantage or other reasons of self-interest (FT, 2021). This, of course, creates a cultural and political challenge as well as a technical one — how can the incumbents of a system that has been highly successful for them be motivated to transition to (indeed, help build) new financing systems that operate with very different, and more democratically determined, goals, norms and rules?

“Those who seek to understand the evolving field of transformation capital will uncover a fundamental dilemma: they aim to change the fundamental goals of structures and their associated power arrangements and simultaneously aim to raise money from that status quo.” Steve Waddell, 2021

Furthermore, the allocation and management of investments themselves need to be better calibrated to match the nature of the issues that the impact agenda seeks to address. Engaging with complex challenges — be it climate change, biodiversity or homelessness — requires investment approaches intentionally designed to resource both ‘systems of interventions and system innovation’ (Johar, 2017), and not just more single point (albeit ‘scalable’) solutions (UNDP, 2021). This will require investment strategies and portfolios that adopt ‘whole system’ scopes, and pools of capital which then have the flexibility to be applied and managed in concert — harnessing the interconnections between actors and activities, employing multiple instruments with fitting structures and return profiles, and being highly sensitive and adaptive to emergent properties within the systems as activities progress and change happens.

“The challenge for financing is not about risk diversity across sectors and portfolios but finding synergy within portfolios and places/systems. The challenge is not about getting one man on the moon but about getting civilisation up in the stars.”

Indy Johar, 2017

Designing for systems-based financing — what principles, attributes and considerations will be required? The Yunus Centre, Griffith University (2021)

In summary, in framing this domain, we argue that creating a financing system that is genuinely compatible with the task of progressing an agenda as radical and all-encompassing as the SDGs will necessitate step-changes as well as scale.

Beyond increasing the supply of capital and expanding the scope of objectives and performance metrics to incorporate impact, there should also be a fundamental reshaping of: mindsets, power relations, partnerships, incentives, regulation, policy, methods, practices, measurement and accounting frameworks, and the underlying market infrastructure. Beyond evolving and entwining existing fields, the task ahead is, in part, forging a new one.

If we seek genuine transformation in respect to society and economy, we need a corresponding transformation in the financial systems that resource them. A daunting challenge, but that one that cannot be ignored or simplified because of its magnitude. We acknowledge that many pockets of transformational work are already happening, but believe more re-imagining, experimentation, and demonstration is needed.

“Transformations capital is distinct enough from progressive capital to be thought of as a new field in finance.”

Steve Waddell, 2021

Our Approach

As noted above, we are approaching our mission-led R&D work across three levels of activity (program, mission and project). At the mission-level for this domain, our focus is:

Catalysing the mindsets, capital flows and financing approaches that can address structural inequities and foster systems transitions towards regenerative futures.

Within this focus, and grounded in the conceptual framing outlined above, we are working to ‘test’ the broad hypothesis that a mission-led approach to R&D can help address the grand challenges of our time and support progress towards transformative goals. Our method is primarily action research and includes demonstration projects that provide opportunities to work practically with novel ideas and approaches in a relatively self-contained way, and provide proof points that can translate across different contexts and levels of scale. We are committed to the principles of partnership and communication, and amplifying promising working in this field.

Within our impact finance mission, we will progress this approach through three explorations:

New mindsets
Growing the mindsets and capabilities of actors engaged in the supply, demand and market development of impact finance. We intend for this to include:

  • Increasing visibility, awareness and discussion around systems innovation and transformational approaches to impact financing.
  • Challenging paradigms, mindsets, and approaches that may have been highly successful in commercial investment but are ill-suited to the goals and contexts of impact financing.
  • Exploring the implications of cultural biases, context and power relationships in determining perceptions of risk and ‘invest-ability’ (or credit worthiness), and also the access to and the allocation of financial capital.
  • Reimagining relationships and accountabilities between the supply and demand sides of capital, and developing investment and governance processes that span sectoral and cultural contexts, and foster equitable partnerships.
  • Exploring the significance of values-led approaches to investment (‘means AND ends’), especially in Indigenous contexts.
  • Cultivating ways of thinking and acting that are better aligned with the reality of systems innovation, including expanding notions of impact management and performance to put greater emphasis on experimentation, sensing, learning and adaptation.
  • Growing ‘impact literacy’ in the financial sector enabling professionals to strengthen their capabilities and work more fluidly, usefully and legitimately with associated concepts and practices.
  • Growing the financial literacy of actors engaged in impact-led activities to strengthen their confidence in adopting growth strategies and their capabilities to determine and access appropriate forms of investment.

New capital
Catalysing new capital flows that are aligned with the pursuit of transformational goals and systems transitions. We intend for this to include:

  • Exploring opportunities to increase flows of flexible capital towards impact goals from private, non-profit, philanthropic and public sector entities, including novel ways to leverage existing commitments and AUM.
  • Growing bottom-up financing through crowdfunding and other distributed platforms.
  • Exploring opportunities to generate new capital flows which have the explicit purpose of pursuing transformational goals, creating public value and the flexibility to resource systems-based approaches. Opportunities to generate this type of ‘commons’, ‘systems’ or ‘transformational’ capital could potentially come from unlocking latent resources (like the dormant bank accounts that partially capitalised Big Society Capital in the UK), micro taxes, targeted quantitative easing, progressive public and private endowments, or aggregating multi-stakeholder sources of capital to create new and flexible pools.

New approaches
Designing, demonstrating and supporting investment approaches that can address structural inequities and foster systems transitions towards regenerative and distributive futures. We intend for this to include:

  • Designing and testing new investment frameworks and mechanisms that increase access to finance and unlock the latent potential of underserved actors and activities (in ways, and on terms, that are appropriate for their needs and context).
  • Exploring frameworks, approaches, and mechanisms that allocate capital through systems-based approaches and portfolios (linking to new flows of commons / systems / transformational capital). This also includes place-based investment where place acts as the container for systems-based approaches.
  • Exploring frameworks, approaches, and mechanisms that allocate capital in ways that intentionally address both inequality and inequity (and purposefully distribute benefits and returns).
  • Exploration of technologies that can better facilitate equitable access to finance and also enable systems-based allocation.
  • Exploration of technologies that enhance sensing, data capture, learning, participation and multi-stakeholder cooperation.

Work Underway

Here’s a PDF version of this post, including our Impact Map.

To connect with us and discuss this work please contact Prof. of Practice and Yunus Centre Co-Director, Alex Hannant.

Read more of our thinking on Impact Finance in our Impact Investment Provocation series: We need to talk about Impact

References

‘2020 Annual Impact Investor Survey’, Global Impact Investment Network, https://thegiin.org/research/publication/impinv-survey-2020

The world’s largest asset managers — 2020’, Thinking Ahead Institute, 2020

‘Transition of Impact Economies — A Global Overview’, GSG, 2019

Impact Management project, https://impactmanagementproject.com

‘Operating Principles for Impact Management’, International Finance Corporation, 2019: https://www.ifc.org/wps/wcm/connect/topics_ext_content/ifc_external_corporate_site/development+impact/principles/opim

SDG Impact: https://sdgimpact.undp.org

‘UN Secretary-General’s Strategy for Financing the 2030 Agenda’, UN, 2019: https://www.un.org/sustainabledevelopment/sg-finance-strategy/

‘The Sustainable Development Goals Report’, 2020: https://unstats.un.org/sdgs/report/2020/

‘The $100 trillion dollar machine’, BCG, 2021: https://www.bcg.com/en-au/publications/2021/global-asset-management-industry-report

Venture Capital’s “Me Too” Moment’, Calder-Wang et al, NBER Working Paper №28679, 2021

‘Building Civic Capital’, Dark Matter Lab, 2020

‘An investigation into financing transformation’, Waddell, Catalyst 2030, 2021

’10 Provocations for the Next 10 years of Social Innovation’, Johar, 2017

‘Ventures and transformation’, Possibilian Ventures, 2020

‘This Is Not an Impact Performance Report’, Dichter et al, SIIR, 2021

‘Systems Finance for Development Portfolios’, Gurciullo et al, UNDP, 2021

‘Equality Impact Investment Toolkit’, EIIP, 2021: https://equalityimpactinvesting.com/eii-resources

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The Good Shift

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